On May 9, 2014, the Internal Revenue Service issued Proposed Treasury Regulation Section 1.856-10 under Section 856(c)(5)(C) of the Code relating to the definition of real property for purposes of the REIT provisions of the Code.
Proposed Treasury Regulation Section 1.856-10 (the "Proposed Regulation") defines real estate as consisting of 3 different types of assets: land, improvements to land, and intangible assets. As under the current Treasury Regulations, improvements to land include inherently permanent structures and structural components of inherently permanent structures. Each distinct asset to be classified as real estate is either listed as an inherently permanent structure or structural component or must satisfy a facts and circumstances test. In addition, it must be passive and not perform an active function.
A key conclusion of the Proposed Regulation is that solar and other renewable projects may qualify as real estate, except to the extent that distinct assets are not inherently permanent structures or structural components and do not serve a passive function. However, a solar project dedicated to a single building may qualify in its entirety as a structural component of the building.
The Proposed Regulations
The approach of the current Treasury Regulations, revenue rulings and private letter rulings are adopted by the Proposed Regulation which specifically includes as inherently permanent structures, among other things, towers, telephone poles, parking facilities, pipelines, drilling platforms, storage structures, wharves and docks and outdoor advertising displays. [More ...]
The Proposed Regulation specifically confirms that intangible assets, such as goodwill, land use permits or other permits for the use, enjoyment of land, qualify as real estate. However, a permit to operate a business, such as the right to operate a casino in a building would not qualify as real property.
The new distinct asset approach is designed to remove the uncertainty in the current Treasury Regulations whether certain assets that are permanent structures or components thereof are not real estate because they are used in the operation of a business. [More ...]
The effective dates of the Proposed Regulation are the calendar quarters beginning on or before the date published in Federal Regulations as Final Regulations. Due to the favorable guidelines in the Proposed Regulations, taxpayers are anticipated to begin relying on them immediately as indicating IRS acquiescence in the expanded definition of real estate for REITs.
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